The board also has some ability to influence the direction of the young fund, which can be important if it underperforms or strays too much from its intended strategy. Cochran
has a client in his law practice who “doesn’t like to invest in [any new funds] where he doesn’t have a say. He has been a passive investor before and has gotten burned.”
However, Elkus warns that there is a downside to getting intimately involved with a fund. “You’re no longer an anonymous investor in a faceless group. It will be harder to pull your money out from under this manager and the other investors,” he says.
Family offices that do not want the commitment of being on the advisory board often negotiate for access to the fund manager. He might provide input into other deals the firm is considering or periodically talk to the family and staff about what investments he has made and why.
“We’ve negotiated educational opportunities, usually meetings where the managers will talk to the people in our office about how they pick deals,” the Threshold Group’s Powers says. “It’s also been helpful for us to learn things like how they do due diligence on certain kinds of companies.” The Rookie Factor
Former family office president and boutique firm investor Bill Elkus warns that
there are risks inherent in backing a rising star who has never actually managed
his own fund. If he repeatedly underperforms, it might be hard to get rid of
him. “He’ll rely on this contract to keep his position,” Elkus says. However, if
the fund takes off with huge returns and investors lining up to get in, “he’ll
try to renegotiate that contract with you,” specifically, he will want the
family office to accept a smaller share of his profits.
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